Contingent Protection, and the International Distribution of Excess Capacity

The implications of demand and cost fluctuations, both anticipated and uncertain, for the international distribution of industrial excess capacity are explored. Three partial equilibrium models of excess capacity and contingent protection policies which are correlated with distress on the part of the domestic firms are constructed. It is argued that conventional tariff-equivalent measures of protection are substantial understatements of the long run effects of contingent protection when sunk costs in the form of capacity are large. It is also argued that contingent protection exacerbates the degree of excess capacity on average in the industry, and further that anticipation of the policy 'triggers' for implementation of contingent protection fosters collusive behaviour in the industry.